How to

Don’t worry, be greedy. How to play the debt ceiling crisis.

Hakuna matata. When we made a musical score for the markets, the famous song came about The Lion King would be hard to beat.

Everyone knows that global financial markets will implode unless Congress lets the US government borrow more money, but investors seem to have faith in Congress and President Joe Biden.

If there were real concerns about the inability of political leaders to do what is right for America, stock prices would not remain relatively high and option volatility would not be unusually low. But they are.

The


cboe volatility index,

or VIX, is around 18, suggesting that


S&P 500 index

will move up or down by about 1% each day for the next 30 days. Fears of a major financial crisis should keep the VIX trading at 30 or higher.

Of course, anyone who takes comfort in high-level market values ​​is medicated or delusional. All one can say with any degree of certainty at this moment of economic time is that the stock market is always priced right, but it has a terrible sense of timing. The same is true for option volatility.

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Additionally, the great Warren Buffett, a paragon of patience with a record at turning chaos into cash, is reportedly happy to be sitting on cash. Many readers agree. You recently mentioned the joys of making 4% or more on your money without taking any market risk. After all, the stock market’s historical annual return is only around 9%.

Still, we recognize that there are those of us who like to monetize chaos before it happens. After all, debt ceiling negotiations started late Tuesday and much remains to be done as the US government could run out of money by June 1st


SPDR S&P Regional Banking

exchange-traded funds (ticker: KRE) remain an intriguing way to try to bearishly trade the debt ceiling crisis, which could hit economically sensitive bank stocks, which tend to be on the front lines of the US economy.

We proposed a spread on KRE put options in early April when the ETF was at $42.46. We proposed to buy the September $40 put and sell the September $30 put for around $2.20. The spread is now worth about $4.20, up 91% in about a month since the ETF has fallen to about $37. (Puts give holders the opportunity to sell an underlying asset at a specified price within a specified period of time.)

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Investors looking to take profits or initiate a new position with the KRE strategy can buy the ETF’s $35 put and sell the July $25 put. The spread cost around $2.40 when the ETF was around $37. If it is $25 at expiry, the spread is worth a maximum profit of $8 ($10 spread minus $2 premium).

A recent Federal Reserve survey of senior loan officers showed that credit conditions were tightening and credit demand softening, which would impact bank profits.

Patient investors can just wait and watch Washington’s leaders. There will likely be a lot of brinkmanship, and that could lead to micro-bursts of volatility.

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If stocks plummet on the debt ceiling debate, consider selling puts on blue-chip stocks that you can store for three to five years. Should stocks rise after the crisis is resolved, consider selling bullish call options on your stocks to boost returns.

Both approaches aim to monetize fear and greed. The strategies express a desire to get paid by the options market just for agreeing to be a long-term investor in blue chip stocks. As previously mentioned, the US stock market is the world’s reserve currency. Yes, there are risks in owning stocks, but investors have many ways to deal with them.

Steven M. Sears is President and Chief Operating Officer of Options Solutions, a specialty asset management firm. Neither he nor the firm have any position in any of the options or underlying securities mentioned in this column.

E-mail: [email protected]

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